Strategy for the Telecommunications, Media and Technology industries

Netflix in Australia: A drama unfolding

Netflix launched in Australia on the 24th March 2015, just over 4 months ago. In Netflix’s Q2 earnings call it identified that it had added 0.9 million members in the US and 2.4 million members internationally. A large portion of the 2.4 million international members have come from Australia and New Zealand which are already achieving profitable contribution according to Netflix. This post explores the market’s expectations before the Australian launch, the prevailing results of Netflix’s first 4 months and provides some ideas on where Netflix is headed in its home and international markets.

Expectations before the Australian launch

Expectations of Netflix’s Australian proposition before launch in March this year followed three major themes.

1. Australians already use Netflix – so it will have a flying start:

Netflix’s popularity was already evident in Australia prior to launch. At the end of 2014, even before announcing its intentions to enter the market it wasreportedthat Netflix had ~200,000 Australian subscribers to its US service (using local VPN to access). In terms of market share, Netflix had ~27% share of the subscription TV market behind Foxtel (49%) and Rentals/Quickflix making up the rest. This already strong position has been a base for the Australian service to grow and potentially points to the new market entry strategies (by stealth) of digital ‘game changers’ (think: Spotify, WhatsApp).

2. Broadband speed will hamper viewing experience:

ADSL2+ runs at a theoretical max of 24MBps and cable/NBN services can achieve up to 100MBps. The reality is that speeds are lower than this. With the greater portion of Australians currently running on ADSL2+ it has been thought that Netflix’s longer term sustainability depends on improvements to network speeds, bandwidth and cost of connection.

3. Netflix will be complementary to existing cable and FTA TV services:

It wasreported just after launch that the Netflix Australian catalogue included up to 7,000 fewer titles than its US counterpart. The service comes with access to Netflix’s original series (e.g. House of Cards) and ‘quality content tailored to the market‘. Exclusivity of content is a major driver of whether Netflix is a ‘cord cutter’ or not. Without access to sport in particular it was expected that streaming will complement other viewing services.

Netflix – The first 4 months and the market responses

The expectations prior to launch have certainly been addressed. Netflix popularity has buoyed its first 4 months results but over 70% of households still do not pay for TV which is partly cost, partly content and partly internet speed.

Roy Morganstarted measuring Netflix take-up in April this year. The first numbers showed 755,000 Australians had access to Netflix. By May the subscriptions were 1 million and by June it was reported that subscriptions were over 1.42 million (~400,000 homes) – a growth rate of ~300,000 subscriptions per month. The most recent press on a report byCitihas shown that Netflix already has 1.6 million active users; with 900,000 of those paying a subscription fee (the first month is free).

In the backdrop of this meteoric rise have been the strategic responses from other Streaming Video on Demand (SVOD), Cable and Free to Air (FTA) players.

Streaming gets attention and price of basic cable drops

Australia’s other streaming services (Stan, Presto, Fetch) have been buoyed by the attention on Netflix but are behind in terms of subscribers with Stan (Nine + Fairfax) in 2nd place with 332,000 sign ups and about half as many paying customers. Foxtel, Australia’s major cable company, has dropped its basic entertainment cable + stream offering to $25/month (Netflix is $9-$15) in an effort to remain relevant to SVOD price points and offerings.

Alliances formed but Free to Air is likely to suffer most in the short term

Strategically, alliances have been formed between Free to Air, Cable, Telco and media companies (Stan – Fairfax and Channel 9, Presto – Foxtel and Seven, Fetch – Foxtel, Optus, iinet) and Foxtel is awaiting approval for its proposal to take a 15 per cent stake in commercial television broadcaster Ten. IT is an explosion of content consumption and these alliances point to the future of TV viewing in Australia. Current reality is that ~70% of households still do not pay for TV, but any time spent watching Netflix or SVOD services is timenotspent watching traditional TV.

Where to next for Netflix?

Netflixnow has 23.3 million international subscribers – out of a 65.6 million global total. International revenue rose 48% year over year to US$454 million, but is still recording losses (US$92 million). Reviewing their financials, the aggressive expansion plan contributed to a continued drop free cash flow and debts – driven primarily by an increased investment in original programming. Like Amazon, Netflix’s plan appears to be one that continues to sacrifice profit in the interest of growth– but why is this so important?

When it comes to the TV value chain, it is highly differentiated content creators that retain the most power. The winning SVOD business models are those that invest millions of dollars in new TV shows to drive growth, and have reruns and old movies as filler. Netflix is essentially HBO with a unique delivery system and customer experience. Netflix faces strong competition for attention from traditional pay-TV, Free to Air, as well as Amazon Prime, a revitalized Hulu, and HBO especially in the US. And although Netflix’s hit rate is improving HBO continues to be must-see TV.

ThisHollywood Reporterarticle provides an interesting comparison of HBO and Netflix and highlights the integrated nature of a company like HBO (content to delivery) compared to the modularised nature of content creation at Netflix. People turned off the queue at HBO for their hit show are being picked up by Netflix who are taking advantage of this bottleneck. Netflix, like other exponential companies (e.g. UBER, Airbnb) is addressing an old content creation model and its own issues in a new way.